Change Management

 

 

CHANGE brings you excerpts of an address by N. SANKAR, Chairman, the Sanmar Group, at the Annual General Meeting of the Madras Management Association on 27 June, 2003.

would like to define Managerial Excellence from a macro perspective as excellence in managing the processes of management in your business or industry to maximise returns to stakeholders. Unfortunately, different stakeholders have different and, quite often, competing demands, and it is mathematically impossible to maximise returns simultaneously on two or more independent yardsticks. Thus it is my personal belief that all-round interests are best served if a management concentrates on maximising returns to its investors. However, in so doing, it needs to manage the different elements of its business processes to ensure that its other stakeholders are kept at a high level of satisfaction. Without satisfaction of all stakeholders, no management can maintain forward momentum over the long term.

Managerial competence will involve breaking down the management process into its individual components and optimising each of them, whether it is in purchasing, manufacturing, marketing, Human Resources policies to motivate people to deliver the maximum, financial management to ensure the best returns, or in adopting state-of-the art techniques to reduce impact on the environment and drawdown of scarce energy resources, in adhering to the highest ethical standards ?all these are the different sub-sets of the management process, and each has to be analysed and optimised to ensure excellence.

Changing Perceptions
The concept of Managerial Excellence is not static. Public perception of who the best performers are has changed many times over the years that I have been a part of the business scene, and I am sure will change again in future.

In the sixties, it was primarily the multinationals and the managing agency houses that had established themselves in India, who were really looked at as the top tier. Among Indian houses, the Tatas were perceived to be the leaders.

In the seventies, the advent of the Foreign Exchange Restrictions Act and restrictions on foreign holdings quickly led to the eclipse of most of the international players. Many of their financial results took a dip, and with it their reputations. Simultaneously, the perception spread that what really mattered was how much you grew, and not how you grew. Ethical standards took a dip, perhaps naturally ?the stifling controls of that era ensured no worthwhile growth could take place without bending the rules. Further, with tax rates of over 90 per cent, nobody really looked at the published bottom line as delivering a true indicator of managerial performance. How many industrial licences you garnered by working with the system, how many greenfield projects you set up, no matter whether you were competent or capable to manage them, how many businesses you acquired from multinationals exiting the country ?these became the score lines of success in the seventies.

With the gradual relaxation of controls, and the lessening of tax rates in the eighties, things changed again. Several new players joined the game, and some of the established ones again began to see some growth, although every other achievement was overshadowed by the thunderous footprints across the industrial landscape of one outstanding personality. While there was debate on Dhirubhai Ambani’s methods, there was no gainsaying the tremendous admiration that he generated among investors, lenders and the general public. Ultimately, I guess, excellence is what excellence is perceived to be, and not what is derived from a set of calculations on financial reports.

With the opening up of the Indian economy at the beginning of the nineties, things again took a turn. Traditional management mindsets no longer mattered. There was no cozy protectionist curtain providing managements the time to pause, analyse and re-group. Businesses were rendered unviable overnight, and there were not many shoulders for managements to weep on. In the nineties, the speed at which you adjusted to the changed circumstances to ensure survival, defined Managerial Excellence. Concepts such as “core competence?and “right sizing?gained currency.

As the nineties progressed, many new global business opportunities were thrown up ? opportunities based on India’s core advantages, and not as earlier on the securing of a licence or permission; opportunities that were not envisioned just a few years earlier. If anybody had predicted in the latter half of the eighties that in less than 10 years the most profitable and growing businesses in India would be software, service industries, entertainment, telecom, a whole variety of consumer goods, and so on, he/she would have been met with considerable disbelief. The Indian middle class gained worldwide recognition. Estimates of its size varied from 50 to 350 million, and a large number of international players came into India to offer this vast, virgin market products ranging from cars to soft drinks to entertainment electronics, branded clothing, etc. As we are aware, it is now recognised that there is no one middle class with a uniform purchasing power for different goods, and many of the new players burnt their fingers with idle capacities and large upfront expenses. But here, again, those that stuck it out and took time to analyse and determine the success factors in their business did come through.

At the dawn of the 21st century, it was the entrepreneurs and the managements that were able to foresee the pace of growth of the new opportunities, and build businesses to capitalise on them, that emerged at the top of the pack and were most admired for their managerial excellence. The software czars are lionised by the stock markets, both domestically and internationally, their companies ranked among the most valuable Indian corporations. N.R. Narayanmurthy of Infosys receives management awards so frequently, it is difficult to keep track of them. But it is important to note that no one questions that they are all fully deserved, and I guess that defines the current standards of Managerial Excellence ?continuous growth, financial returns that would have been unthinkable a few years ago, all combined with a well-knit management team adhering to publicised norms of corporate governance and ethics.

What I have said about changing perceptions of excellence can easily be judged by looking at the make-up of our awardees today. Some years ago these would have been representatives from the engineering, sugar, textile or chemical industry. Today we have a representative of the software industry (in fact even his title of Chief Knowledge Officer would not have been dreamt of in the eighties) and one from the management of an educational institution. Thankfully, we also have a representative from the manufacturing sector. It is well accepted today that management is not required only by industries, but equally by hospitals, by educational institutions, by NGOs operating in rural India, by the service sector, and so on. What is important is that in each and every one of these fields, success requires that you set high standards and achieve them.

The Make-up of Management Excellence
As I said earlier, there are many many components of the management process that one could talk about for hours, but I am picking three that I believe are especially crucial in today’s context to achieving Managerial Excellence. This belief is based on my personal experience.

The three are:
1. The critical need for a relevant organisation culture/performance culture.
2. The phenomenon of variable returns to all stakeholders, and
3. Business ethics and corporate governance.

1. Organisation/Performance Culture
When India entered the global arena in the early nineties, there were indeed managements who recognised that the business opportunities of the future would be very different. They recognised that growth rates in the exciting world of the new economy would be high. Unfortunately, many of them were unable to act on their convictions. Most businessmen of that era were heavily committed to the so-called “old economy?industries, and it was these industries that were put under the maximum pressure by the sudden influx of global competition. They recognised that before they ventured in any worthwhile way into new areas, they had to remould their existing businesses to survive, and hopefully make gradual progress under the new rules of the game. Unfortunately, not all of them succeeded and many of the traditional business houses are no longer at the top of the ladder. But, equally, there are others who have very successfully re-fashioned themselves into fighting fit organisations, moulded to the demands of the 21st century, ready to take on global competition and, in doing all this, delivering excellent returns to their primary stakeholders. There are many shining examples ?many of them are from our part of the country. Their turnaround was not achieved easily. The years of restructuring were extremely difficult ones, but having come through successfully, they are the examples from whom we can glean the touchstones of managerial excellence.

The first lesson that many of them learnt was that benchmarking yourself to competition next door, or from the next state or even from upcountry did not matter any more. You had to be able to stand up to competition from overseas, from players who had achieved global-scale costs and deliveries. Obviously this was not possible in all businesses. But there are excellent examples where an industry has come through the baptism of fire, and is today a viable global player. The engineering industry comes readily to mind. Given India’s natural advantages in terms of significantly lower costs of excellent manpower and of castings and forgings, India has become one of the world’s best sources for engineering components made from machined castings and forgings ?for example, auto components, pumps, process equipment, etc. Exports of these are growing dramatically on a regular, sustainable basis.

One of the imperatives today without which it would be unrealistic to achieve excellence in management when operating on the global stage, is an organisation culture in tune with today’s environment. Such a culture needs to be made up of many parts. First, a transparent, objective style of management. In the past organisations practised “need to know?fairly severely. Today there is a realisation that the more the information about the organisation ?how it is performing, what its problems and potential are, what threats it faces, etc. ?percolates down to the lowest level, the better buy-in you get from employees.

Equally, the management style must be objective. It should be based on detailed analysis and logical response. Today huge volumes of current data are available, and a whole host of management tools to analyse every issue based on the facts, and respond in the most appropriate manner, rather than use a “seat of the pants?approach based on years of experience. It has been clearly proved that a logical management response clearly delivers the best returns over the long term. It also ensures that different parts of a large organisation respond in the same manner, and avoid working at cross purposes, as you would if you had managers working from their personal “feels?on what is best for the organisation.

Another aspect of organisation culture, again crucial to success in today’s milieu, is Detailed Planning and Execution. Planning is no longer an annual exercise put together through a series of offsite meetings, and presented in a big leather-bound document. In today’s fast changing environment, such plans tend to become obsolete literally before the ink is dry. What is required is a rolling plan of action taking into account the realities of the quick changes around you ?changes in the market, changes in your process, changes in people, etc.

To illustrate, in Sanmar for many years now our chemicals business has both depended on imported inputs for raw material, and competes against imported finished products. The prices of both these commodities fluctuate literally on a weekly or monthly basis, and so far we have found no one capable of predicting these movements. We do, of course, have pundits who can explain why the change happened after it has happened, but prediction ?that’s a different game. Anyway, with these changes we found through bitter experience that annual plans were totally irrelevant. For example, we made our capital budgeting plans based on the cash flows predicted by an annual plan. Unfortunately, in a few years the fluctuating prices of raw material and products drove our margins southwards and we very quickly found ourselves spending money that we did not have. After years of struggling with this, our response has been to go to a system of quarterly planning so that there is constant updating to the realities of the situation. These plans are made by people involved in executing them, and not by a strategic planning group sitting in a separate ivory tower. This helps to pin responsibility both for planning and execution on the same persons, and the rewards are also linked to their performance in this regard. Although the planning period may change from industry to industry, I believe the concept of moving with the times is critical and needs to be an integral part of the culture for any successful organisation.

Linked to a structured system of planning and execution, there is a need to spread the message of Performance right across the organisation. “Hunger for performance?needs to be an integral part of the organisation’s DNA. A culture where plan targets are routinely missed is no longer acceptable. Managers who miss their targets need to feel the pain; after all, they are just sharing the pain of the investors who have trusted them with their resources.

Another critical imperative for today’s successful organisation is the need to have a culture of attracting and retaining high quality people. This requires people processes which are open and objective. To attract the best people, they have to feel that they are joining an organisation where rewards are fair; where there is no favouritism in the form of hidden perks or payments; an ethical organisation which adheres to the laws of the land, where they will not have to lose sleep at night over what they are required to do; where they would have the freedom to operate within set guidelines; where decisions can be taken and mistakes made without fear, as long as the logic for having taken the decision can be clarified, and so on.

Employees must develop confidence in the process of appraisal that the organisation practises. A transparent remuneration package, free from hierarchy-linked perquisites, is increasingly becoming the order of the day. In Sanmar we went almost ten years ago to a full cash-based system, and we are convinced more than ever today that it was the right thing to do.

We talked of attracting and retaining high quality people. But there is another aspect to it, of constantly upgrading the pool of management employees. Such upgradation naturally requires detachment of the lowest rung, and a freshening of the pool with new recruits. This process needs to be as objective as possible. Every employee needs to have confidence in the system of appraisal that the organisation practises.

These are some of the important issues that should constitute the culture of an organisation.

2. Variable Returns to all Stakeholders
An idea whose time seems to have come is that of variable returns to all stakeholders. In the past, it was primarily the shareholders whose return was variable. At times of plenty, their dividends and other returns would be high. And, at times of loss, it was they who bore the burden. Today, the concept has changed significantly ? almost all other stakeholders share the ups and downs.

Variable pay for employees (blue collar and managerial) is becoming the order of the day. With regard to the people on the manufacturing floor, productivity-linked wages and bonuses are getting increasingly popular and, more important, accepted by the worker. A decade ago, while the practice of bonus payments was indeed prevalent, those bonuses were more in the nature of a deferred wage. Today unions accept that an increase in their receipts is directly linked to their output, and, further, that the multiplier is getting tighter with every settlement.

But even more dramatic has been the concept of variable pay for management, particularly senior management. In the nineties, with the relaxation of ceilings, there was a manifold increase in rupee terms of managerial pay scales. These increased payouts were well supported by the boom years of the mid-nineties. However, the downturn since then has forced serious rethinking, and today there is increasing emphasis on linking pay to performance.

The concept of employee stock options to achieve this had a brief time in the sun, but given the state of the stock markets over the last three to four years, is no longer in vogue. Developments internationally lead me to believe that it would be difficult for Employees Stock Option Plans (ESOPs) to come back as a primary part of the employee package in most industries.

However, flexing employee compensation linked to a measurable and visible metric is getting increasingly popular. This is being practised by more and more industries. Returns are flexed firstly with regard to how well an employee achieves specific individual Key Result Areas set for him annually, and secondly how well the business as a whole performs, measured either through, say, Return On Capital Employed (ROCE) or Economic Value Added (EVA). The percentage of flexing increases sharply as we go up the management pyramid.

Incidentally, we in Sanmar have had a system in place for some years now. We have chosen ROCE to measure organisational performance, and I must say that acceptance by our people is very good. This measurement lends itself to application across different industries, and that is important in a diversified group since the people that comprise our management look at Sanmar as the common employer.

The other stakeholders, who are also getting variable returns, perhaps unwillingly, are the lenders. With the introduction of the corporate debt restructuring programme, and also generally of a more practical and flexible approach by lenders in tackling difficult accounts and Non-Performing Assets (NPAs), concepts like “forgiving?of interest and principal instalments, “haircuts? interest back-ending, Corporate Debt Restructuring (CDR) programme, etc. have become more and more common. This in a way reflects the lender getting a variable return, since he is in effect foregoing current returns to salvage the business from a difficult environment, and looks forward to sharing in its prosperity as its performance improves.

Even the Government seems to have accepted a concept of variable returns by linking its tax demands to real profits of a business and not to imputed profits through various disallowances and add backs. Although, I must say that the acceptance of these by the general run of revenue officials is still proving difficult.

In my opinion, in future, almost every stakeholder in the business will have to get used to his returns waxing and waning with the fortunes of the business. Business cycles are an economic reality, and acceptance by every constituent of a business, that maximising its performance is essential to him personally, will go a long way towards institutionalisation of a performance culture.

3. Ethics and Corporate Governance
In discussing the elements of a performance culture, I briefly touched upon ethics. Ethics and corporate governance, which go hand in hand, have in the last couple of years achieved tremendous importance. It is becoming increasingly important for organisations to set clear ethical standards, and make them understood and appreciated by each and every employee. The standards should cover areas such as:
Transparency
Equal opportunity
Staying within the law
Integrity of records
Intellectual honesty

These ethical standards should be widely disseminated. We in Sanmar have recently taken the help of the Ethical Business Practice of KPMG to publish our own policies in this regard.

The exercise does not stop with merely publishing the standards. It needs to be demonstrated by a series of in-house seminars and training sessions, using real-life examples. Maintaining the standards is a constant ongoing exercise. No matter how clear the language, I have found that we Indians are great at finding loopholes. A few examples of corporal punishment may perhaps be required to bring home the lesson. Equally, practising of these standards at the highest levels of management sends the right message down in the clearest manner. Ultimately, it is the spirit that matters and not the letter.

Execution
I realise I have meandered a bit, touching on different issues at random. I thought I would end with a concept that is personally very important to me, and that is a culture of execution. I believe that today this is the most critical differentiating factor between winners and losers. Corporate strategy, people strategies, the latest equipment and techniques, hardware, software, top quality managers ?all these are available and anybody who is interested can get them. What will separate the winners is how you utilise them and how well you execute your business plans and your people processes. I refer you to an excellent book by Larry Bossidy and Ram Charan, titled Execution ?The Discipline of Getting Things Done. There are several excellent lessons to be learnt from it.

Execution is the great unaddressed issue in the business world today. It is not sexy, it is not what the stars want to do. It is not even what senior management wants to do. If senior management believes that they should focus on the bigger issues and leave implementation to the foot-soldiers, they are living in a dream world. Leaders have to be involved in execution. Big thoughts have to be translated into concrete steps or action, and then implemented through constant communication and follow-up.

I believe:
Execution is a discipline, and integral to strategy.
Execution must be a core element of an organisation’s culture.
Execution is the major job of the business leader.

The last point is so important, it is worth repeating ?the involvement of the leader in execution. A leader who boasts that he has a “hands off?style and has empowered executives from whom he gets reports on a monthly basis is not doing his job. He is not dealing with the issues of the day. The leader has to be deeply engaged in execution. He has to be personally involved in assigning tasks and then following up for completion.

I am definitely not making a case against delegation or empowerment. These are essential. But, execution does not mean doing the task yourself. It involves setting task objectives for the members of your team, and constantly following up to ensure that the tasks are completed, completed on time, and completed well.

Those who have had the misfortune to deal with me directly know that this is a part of my make-up. I keep calling or following up to ensure that whatever has been discussed and agreed on with me is completed. I know I make a nuisance of myself quite often, and perhaps on very trivial issues. The point is that if I had to involve myself in a trivial issue, then it is important enough for me to ensure that it is completed. I believe this equally applies to each and every one of you ?a culture of task completion.

Conclusion
I have tried to give you my personal feel of the ingredients required to create a culture of Managerial Excellence. In the ultimate analysis, all belief is based on personal experience and, I guess, I am no different. Each of you will similarly have to build upon your experience as you go through the daily grind of business management, and develop your own metrics to measure performance and techniques to improve it.

 

 

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